WaterWalk profit-sharing: 15 years, zero dollars for Wichita

After 15 years and $41 million in taxpayer subsidies to the WaterWalk, the city of Wichita has gotten no money from a profit-sharing agreement attached to the development deal.

And it probably never will, the way the deal is structured.

City Hall didn’t get an explanation why until last week – or even know that it was due one until a few weeks ago.

WaterWalk is a development on the banks of the Arkansas River between Waterman and the Kellogg freeway downtown. It has a Gander Mountain hunting and fishing store and a mix of business offices and residential units, some of which are owned and leased out by the developer and some of which have been sold.

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The contract that governs the partnership between the developer and the city specifies that the city should get 25 percent of WaterWalk’s “adjusted net cash flow,” and that the company must provide the city an annual report accounting for that.

But WaterWalk decided it didn’t need to submit those reports because it didn’t owe the city any money, and the city didn’t ask for them until The Wichita Eagle asked for the data.

When the report was prepared and provided to The Eagle, city officials blacked out every number in it except for $1.

That $1 a year is the total rent that WaterWalk has paid the city each year since 2002.

Under a 99-year lease, a dollar a year gives WaterWalk full development rights to about 29 acres of city-owned property. The lease continues until 2101.

The city’s right to 25 percent of WaterWalk’s profit from subleasing property in the development has been touted in City Council meetings as a deal sweetener for the city. But there’s never been any payoff.

“WaterWalk’s never generated positive cash flow based on the formula that’s been agreed on,” said company controller Kevin Jantzen.

Reports filed with the city last week covered the past six years of WaterWalk operations.

“The calculation (of the city’s share) is not hard,” Jantzen said. “It’s gross revenue less total expenses … then you subtract debt service and then there’s 17 percent development cost return (to WaterWalk) that gets subtracted also.

“That always yields a negative number, so there’s never any 25 percent (city share) to be calculated.”

Due largely to turnover on the city staff and term limits on the City Council, top officials at City Hall were unaware of the contract provisions until The Eagle inquired about them while researching the collapse of WaterWalk’s only substantial retail tenant, the Gander Mountain store.

“When we had transitions in staff, I think the new staff that came on, it wasn’t described to them that this provision was in there,” said Robert Layton, the fourth city manager since the original contract was signed. “We didn’t know they had a different interpretation of that agreement until recently.”

According to city development analyst Mark Elder, “WaterWalk created annual reports, (but) their attorney’s interpretation of the contract was that they only needed provide the annual report if they generated revenue that required the payment of the additional annual rent.”

Jantzen replied: “We do a calculation at our end to prove there’s no rent due. I don’t know what they (city officials) do with it or if we file it for sure, but I know when they request it we give it to them because we keep track of it every year.”

Starting with an original $30.9 million commitment of city funds in 2002, public funding of WaterWalk ultimately rose over time to about $41 million.

The city money paid for land, parking structures, streets, utilities, amenities and, in the case of Gander Mountain, $6 million of construction costs to build the building.

Mayor Jeff Longwell said he’s “interested in WaterWalk fulfilling any contractual agreement they have in place (with the city), even if that contract was made 20 years prior to my time.”

But he acknowledged that “Net cash flow is a difficult business term to use, because that can fluctuate depending on a company’s needs on capital buildout and other things. I guess we’ll just need to make sure we understand the exact trigger in this contract and figure it out from there.”

Layton said he has assigned a staff member to look into the situation and determine whether the city is owed any money under the agreement.

Contract favors developer

The city assembled the property that is now the WaterWalk, and the original ground lease gave the developers the right to use that land for 99 years at a base rent of $1 a year.

The original developers were Jack DeBoer, a pioneer in long-stay hotel chains; Greg Kossover, who managed DeBoer-owned businesses; Old Town developer David Burk; and David and Kenneth Wells of Key Construction.

DeBoer bought out his partners and now is the sole owner listed in WaterWalk’s annual business report, filed with the Kansas secretary of state’s office.

Deep within the city’s contract with WaterWalk are key definitions of “gross revenue” and “total expenses” that make it unlikely the city will ever get a share of WaterWalk income.

WaterWalk’s income from property sales is specifically excluded from “gross revenue,” so if WaterWalk sells a building or a condo, the city gets nothing, no matter how much it contributed to build the buildings.

“Part of the frustration is that WaterWalk’s never developed as it was intended to develop out,” Longwell said. “My understanding is the condos don’t provide rent (to the city). Those were sold to individuals.”

And when WaterWalk rents out shops, offices or apartments to users, WaterWalk can claim 20 percent of the total construction cost of the building each year as part of its total expenses. That’s subtracted from gross revenue before the city’s 25 percent share kicks in, according to city documents.

On the Gander Mountain building, the company formed to manage it gets 17 percent, Jantzen said.

“That’s in a different agreement,” he said. “It’s a side agreement that’s called a sublease between WaterWalk and WaterWalk GM (Gander Mountain) that the city also blessed. I don’t think they actually signed it, but they blessed it.”

He said such agreements are common in public-private partnerships.

“There’s going to be something similar on any development agreement because no developer is going to want to do it for nothing,” Jantzen said.

How much profit WaterWalk can take before paying the city anything was among the figures blacked out in the reports the city provided to The Eagle.

City staff cited taxpayer-privacy exemptions in the Kansas Open Records Act to justify withholding the numbers.

City officials gone

No city official who played a major role in the 2002 contract is still actively involved in government.

The driving force behind the original WaterWalk deal was former City Manager Chris Cherches.

Cherches retired under pressure in late 2003 after a joint investigating team of Eagle and KWCH-TV journalists reported on City Hall scandals involving allegations of financial mismanagement and unethical dealings with politically connected insiders. Cherches died in 2004.

The finance director who worked on the WaterWalk deal for the city, Ray Trail, also retired under pressure after The Eagle and KWCH reported that he and another official had spent more $50,000 of city funds on lavish “consulting” trips to Palm Springs, Calif., and the Florida Keys, including resort hotel stays, extravagant meals and expensive wine.

Former Mayor Bob Knight, term-limited out in 2004 after 24 years in office, said he doesn’t remember many details of the WaterWalk contract.

He also said he doesn’t remember anyone from city staff ever warning him about adjustments to net cash flow that could render the city’s WaterWalk profit-sharing agreement worthless.

“That seems kind of generous,” Knight said. “I just don’t remember it that way, but I guess it is. I’m not sure why I would have supported that.

“I do know it (the current WaterWalk) is dramatically different than what the city had planned for property in that area.”

Project scaled back

The WaterWalk was originally envisioned to replace a marginal neighborhood of apartments and small businesses with an upscale dining, entertainment, shopping and residential district.

It was supposed to include a large outdoor amphitheater and canal boats, echoing San Antonio’s successful River Walk.

The WaterWalk amphitheater was replaced with a small floating stage on the riverbank, funded by a $249,000 federal grant administered by the city.

For the project’s water feature, the canals and boats were dropped in favor of a Waltzing Waters fountain about the size of a swimming pool.

Food trucks that occasionally park there are the closest thing WaterWalk has to a restaurant.

In addition to Gander Mountain, the development includes:

▪ A seven-story condominium/office complex, whose major business tenant is the city-funded Visit Wichita convention and visitors bureau, which moved from another downtown building.

▪ A headquarters building for the Realtors of South Central Kansas, which also moved to WaterWalk from another downtown location.

▪ A four-story 130-room Fairfield Inn and Suites hotel.

▪ A two-building, 133-unit corporate apartment/hotel complex on the west side of the river, on land originally planned as overflow parking for the WaterWalk.

Knight said it would have been a completely different project if the city and WaterWalk had succeeded in landing Bass Pro Shops, which he thought was a done deal when he left office.

He said it wasn’t clear why the deal fell apart, but, “It was clear to me in my years of experience that this would have been a tremendous possibility for the city.”

Things are unlikely to get much better anytime soon.

Now that Gander Mountain is going out of business, Camping World, which bought the Gander Mountain brand in bankruptcy, may or may not decide to stay in the WaterWalk.

Camping World CEO Marcus Lemonis has said he is committed to doing something in Wichita, possibly a co-branded Camping World/Gander Mountain store.

But to do that at the WaterWalk, Lemonis has said he wants at least a 25 percent rent reduction from the $489,000 a year Gander Mountain was paying for the space, along with rights to showcase recreational vehicles outside the store.